By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The safe-haven yen rose on Wednesday, while sterling plummeted to a 31-year low on mounting worries about the broader impact that Britain's vote to leave the European Union would have on the global economy.
The yen soared to a 3-1/2-year high against the British pound and climbed to two-week peaks versus the dollar and the euro.
Sterling fell below $1.28 against the dollar for the first time since 1985 on fears of foreign outflows and interest rate cuts by the Bank of England following the vote to leave the EU in the June referendum. It recovered from those lows, but was still down 0.9 percent, at $1.2939. [GBP/]
"The referendum result prompted a significant adjustment in the pound, but we think more losses lie ahead and target sterling/dollar to $1.25 into year-end," said Shaun Osborne, chief currency strategist at Scotiabank in Toronto.
"The U.K. is facing a protracted period of uncertainty about how the exit will be negotiated. This will weigh on major investment decisions and growth."
Fears of contagion intensified after several U.K. property funds stopped redemptions and suspended operations, driving investors to the safety of government bonds.
The benchmark 10-year Treasury yield sank to a record low of 1.3210 percent <US10YT=RR> on Wednesday while German Bund 10-year yields went deeper into negative territory <DE10YT=TWEB>.
In late trading, sterling dropped versus the yen to its lowest level since late 2012, and was last down 1.1 percent at 131.03 yen <GBPJPY=>.
Against the yen, the dollar fell 0.5 percent to 101.26 yen <JPY=>, after earlier falling to a two-week low of 100.22 yen. The euro inched lower to 112.50 yen. <EURJPY=>.
The dollar retraced its losses against the yen after data from the Institute for Supply Management showed that growth in the U.S. economy's service sector increased in June at its fastest pace in seven months.
The greenback also lost against the euro, which was up 0.3 percent at $1.1103 <EUR=> following the ISM report.
Expectations that the Federal Reserve will keep U.S. rates lower for longer have weighed on the dollar since Brexit. Influential Fed policymaker William Dudley suggested on Tuesday that broad contagion through financial markets was a risk, particularly if the vote leads to EU instability.
Fed Governor Daniel Tarullo also weighed in on the U.S. rate outlook, saying on Wednesday that it is better to wait for more evidence of inflation moving to the Fed's target level before taking further monetary policy action.
The release of minutes on Wednesday from the Fed's June meeting showed that policymakers took a wait-and-see stance, indicating rates should remain on hold until the U.S. central bank has a better understanding of the consequences of Brexit.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Leslie Adler)